It has been a long time since I last posted while trying to get a sense of ENGlobal’s direction. Moreover, determining what is affecting the downturn of the stock, the economy and/or management. I have been about as bullish as anyone can be for the last 10 years. I have been honest about the potential I saw from below .50 cents to an all time high of over $18. The bashers were wrong and had their own agendas, for if you followed their advice you would have not had the potential of making money in ENG’s past long-term rise.
That said, observing results and listening to comments in CCs and releases over the last year I do not like the trend. Especially the information. Long-term I have confidence ENG will grow back. They fill the needs of an oil dependent world and other areas ENG is expanding into. Short-term has been and is awful. For the last 5 quarters we have had surprise earnings all of them massive up or down.
2Q ’08 huge up, euphoria reigned, CC comments were “ENG will meet or exceed in 3Q ’08 compared to second quarter”. The economy cratered and right in the midst, at the worst possible time ENG warns and then performs 11 cents short. The 3Q ’08 CC was more reserved and less bullish. Investor’s I know came away feeling from information related that hurricane Ike was mostly to blame. Not so in my opinion. Four loss areas were discussed with varied emphasis, the hurricane being one of them. However, I can tell you from both rough and detailed calculations I made that the hurricane losses were only about 2 of those 11 cents. That leaves 9 cents of management related miss. Remember, we were warned rather late too, that is indicative.
After a long period with little affecting news came 4Q ’08 earnings in March ’09 with some moderate upward surprise, mostly due to hurricane repair work. Investors still in shock over the markets and the last quarter were little impressed. In that CC one would think ENG’s problems had settled down but there was some warning that ENGlobal was not immune to the economy. The later was proved with analysts’ missing by 7 cents in 1Q ’09. Then this CC led me to believe that the problems had leveled off and things were going to improve. Wrong again. 2Q ’09 came in with “breakeven” results. Now this is excellent IR phrasing for other news agencies picking up the story – actually brilliant. Let me rephrase 2Q ’09 in actual numbers: ENGlobal missed by 8 cents. That is terrible, simply speaking.
How did the press react? Not negatively and that was unusual. Some history: Remember in the past when Sidoti raised their estimate days before earnings in a 3Q? This was enough to raise the consensus estimate and in effect cause a technical miss by a penny on diluted shares (on target with basic shares). Results were actually an upward surprise by a penny over Sidoti’s previous estimate on basic shares. IMHO, someone did not want that good news. What story did all the business news announced? There was huge negative press over a penny miss on one analyst‘s questionable action. One penny then, so why was this massive 8-cent miss less attacked? One, the wording was better. Two, also with the earnings release came the announcement of a small acquisition. I understand “small” as less than 20 people and the actual number of gained employees wasn’t released - so you know it was small as described. Nevertheless, this got unusual positive play with an unusual (for ENGlobal release rates) follow-up news release ten days later that the acquisition was completed and integrated. Again, it confirms being small with the short period of completion.
Back to the question, why did the media seemingly pump this news and less severe about the 8 cent loss? Three, short interest was way down so no “down game” from hedge funds is a possible theory. Then I saw an old institutional owner Jeff Gendell and Tontine had bought back into ENG! Check institutional ownership. Could this be reason number four?
http://www.zerohedge.com/article/guest-post-jeffrey-gendells-hedge-fund-tontine-associates-rebirth
There is no proof outside of witnessing but last time Gendell/Tontine got in and during his ownership tenure strange things happened to the stock. Unusual pumping and negatives from press, one particular analyst and public forums. Sidoti started covering ENG soon after Gendell originally bought in. I note there are additional hedge funds that own significant shares, therein lies more potential, even competitive manipulation. Anyone that thinks hedge funds act fairly within a fair market should not invest. (See the Cramer hedge fund confession video in a previous post.)
Now with Tontine entering the picture again we have unusual positive handling by the press. Remember, at this point there is insignificant short interest. Then came along an article by The Fool dot com:
http://www.fool.com/investing/dividends-income/2009/08/24/fearful-stocks-for-greedy-investors.aspx
They are generally respected and usually write good articles with fair factual coverage. Before I knew the powerful Gendell/Tontine entered the stock again I could not understand the aforementioned positive press and now an actual pumping article about ENG. The whole basis of the Fool article was what a price deal it was based on WAY past earnings without mention of the several recent terrible quarters and trend. Moreover, in the past they have delved into management analysis and how this relates to results, but not so in this article. I know and like ENG very much but this was a biased favoring pump. The 2Q ’09 CC, again, offered more of the same feeling that the problems are behind us with a slow but improving picture. Metrics were offered this time, but with no comparing references they are soothing at best.
I have believed ENG has suffered manipulation in the past and now. I have made trades that were seemingly countered beyond logical account on too many occasions. Other investors, brokers and past ENGlobal management have reported the same to me. I have more information presently to consider besides unusual behavior and constant Level 2 observations I made in the past. I knew a sophisticated computer Algorithmic Trading programs that appears to sense all the major markets inputs was in play. I even discussed this with a NASDAQ representative who agreed it happens on the NASDAQ. What I found later and this representative did not tell me was that Flash Trading was being sold as subscription by the NASDAQ and other markets. Look it up on Wikipedia and in Google.
http://en.wikipedia.org/wiki/Flash_trading
http://www.reuters.com/article/businessNews/idUSTRE59Q21B20091027?feedType=nl&feedName=usbusinessearly
http://en.wikipedia.org/wiki/Algorithmic_trading
You will be appalled at what Flash Trading does, and that the SEC is slow to act on this. Basically, it gives a subscribing customer a split second advantage to know what Bids and Asks are being placed before what the public knows. In a sense it is a private pre-market. With this Flash information tied into a computer program the computer can then counter any undesired effect (within certain and most common volumes). All of this is done at speeds just below the speed of light. I ask you - does not this make you mad? Isn’t this a fair market removed? The SEC is supposedly trying to correct this.
Also consider Dark Pool trading. It is a means whereby institutions can operate under cover without exposing their moves. Again, this is outside of what investors are supposed to know according to SEC rules and fair markets.
http://en.wikipedia.org/wiki/Dark_pools_of_liquidity
http://www.reuters.com/article/businessNews/idUSTRE59Q0QP20091027?feedType=nl&feedName=usbeforethebell
We all know what hedge funds will do and use any information they can get to their (unfair) advantage. Anyone I know who trades ENG (as well as other stocks) and uses Level 2 will come to agreement that manipulation occurs. This doesn’t mean you can’t make money. If you play the moves right you can profit. But the program operators know what they want to do and will do ahead of time. ENG’s performance in the past made it easier to make money because they were trending up with staged level offs. The recent downtrend makes it difficult to know what is going to happen near-term, more so with hedge funds doing their thing. I am not expecting good news 3Q ’09, results could be negative. The trend is down and past CC “guidance” has not represented later results. I won’t be over critical because I would try to paint the best possible picture fairly and fair is always debatable. However, you may decide for yourselves by listening to the archived CCs and news releases compared to actual performance and numbers reported. It is all there.
ENG has lost two analysts since last year’s disappointment. Sidoti was one and I don’t miss their biased performance and questions. By the way, Sidoti dropped coverage after Gendell previously dumped ENG. At the moment Gendell/Tontine is the number one stockholder outside of ENGlobal’s CEO, Bill Coskey. As of this writing only one analyst has an estimate of 3 cents for this quarter. ENG missed by 7 cents in 1Q, earning 7 and missed by 8 cents 2Q, thus earning only 7 cents in 1H ’09. We have a 3-cent estimate on 3Q and no estimate for 4Q (can’t blame analysts there). It makes it hard to calculate PE but when you use estimates and educated guesses you can come up with some pretty bad stock prices. 1H - 7 cents plus 3Q’s 3 cents, plus say a relatively good 7 cents in 4Q = 17 cents. Multiply a 15 PE (bad economy) and it yields $2.55. Consider manipulating effects you can have an idea of the possible range.
In the past, I have discussed how I handle PE and I believe I am being consistent with my use in bad and good markets. It just isn’t pretty. At some point the trend will change. I know ENG has lost a significant amount of employees. So have a lot of companies all over the world. I can’t be certain of the numbers so I won’t discuss it, but it does affect billable hours. There was some significant extra money on the 1Q balance sheet I could not account for. This could show up anytime this year, especially as an acquisition. ENGlobal will turn around. How long it will be I have no idea. I can’t tell with recent past and current information. I sold most of my stock and hold a core position. Opportunity waits at some point. That’s the view from my cockpit. You are flying your own aircraft. Good luck to everyone.
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